- SAP Managed Tags
1. Credit Management
In SAP, credit management is a function within Financial Supply Chain Management (FSCM) that oversees and regulates customer credit limits to promote timely payments and minimize the risk of bad debt. Mainly these 3 scope items are responsible for Overall credit management function:
Advanced Credit Management (1QM)
Credit Agency Integration (1RY)
2. Automatic Credit Score Calculation
Automatic Credit Score Calculation is a feature of advanced credit management that streamlines the process of setting credit scores through automation. We will explore how the system is set up and operates to automatically determine credit score.
Please note: This blog is intended for individuals who already have a fundamental understanding of basic credit management. Automatic Credit score Calculation is part of 1QM scope item.
There will be a separate blog for Automatic Credit Limit Calculation.
3. Related Configuration
Some configurations are managed through the configuration node (CBC or Manage Your Solution), while others are defined directly via various SAP Fiori Apps.
Process Step | App Name/ Config | Remarks |
Credit Formula for Score and CL | Define Formulas [CBC] | Just the structure, values are filled with Fiori App |
Rule for Scoring and Credit Limit, Rating procedure assignment | Create Rule for Scoring and Credit Limit Calculation [CBC] |
|
Formula Parameters are created | Maintain Formula Parameters (App) | Formula Parameters are created and assigned to score formula group and limit formula |
Formula is created | Manage Formula in Credit Management (App) | Formula is created (code is used previous one). |
Valuation is assigned against the rules | Manage Credit Management Rules (app) |
|
Credit Details are updated in Customer Master | Manage Credit Account |
|
- Define Formulas (CBC)
Here, we are only setting up the code and framework for the Credit Score Formula. The logic will be incorporated later in the Manage Formula in Credit Management App. This same formula is assigned during the configuration process in the "Create Rule for Scoring and Credit Limit Calculation" section.
- Define Rating Procedure (CBC)
It is an optional configuration if you an agency which cannot find then you can create your own here.
You also need to define the rating results within your rating procedure, similar to how an agency assigns ratings like A, AA, AAA, B, etc or just A, B, C, D, E, etc.
In this blog, we've used the standard rating procedure, 'creditsafe,' for calculating credit scores.
- Create Rule for Scoring and Credit Limit Calculation (CBC)
Here, we create a rule which is used for credit score and Credit Limit calculation. The formula is assigned to a rule within both the Score folder and the Credit Limit folder. We will focus Credit score folder in this blog.
Credit Score Folder:
Here, we assign credit score formula that we had created under ‘Define Formulas’
The rating procedure is like credit agencies, and several such agencies are available in the standard system. You also have the option to create custom rating procedures and assign them to rules for determining credit score.
Note: This Credit Score Rule is assigned with Business Partner (Customer) in Manage Credit Account App. Please refrain from using the Maintain Business Partner App for credit management purposes. It is recommended to use the Manage Credit Account App instead. Using the Maintain Business Partner App may not yield the desired outcomes in some processes within Credit Management.
- Manage Formula in Credit Management (App)
You can create Credit Score Formula from Template or from scratch (create). We will create from scratch.
It is assigned to the formula you previously created in the configuration step "Define Formula."
Threshold and Rounding are applicable to credit limit calculations and will be explained in detail in another blog.
Scoring Formula Tab:
Multiple methods can be defined for calculating your credit score formula. In our approach, we have considered the following factors:
COUNTRY_REGION, CREDIT_GROUP, COFACE_RATING, CREDITSAFE_RATING, and CASH_RATIO
When assigning weight, there are two sections: Parameter Group (General, External Information) and Formula Parameter (COUNTRY_REGION, CREDIT_GROUP, CREDITSAFE_RATING and CASH_RATIO), each requiring specific weight allocation. You must ensure that the total for each individual group sums to 100, and then the overall parameter group weight also totals 100, as shown in the screenshot above.
Penalty Parameter
The penalty parameter is used to apply negative adjustments, such as deducting points, to address minor fraud or other issues in the overall credit score calculation. However, if the fraud is significant, you may opt to stop extending credit to that customer. In such cases, the Exit parameter can be used to set a zero or minimal credit limit, as explained in the next point.
Exit Parameter
The Exit parameter is typically used in cases of bankruptcy, major fraud, or similar situations where you would no longer extend credit to the customer. The Exit parameter sets a fixed credit score for the customer, ranging from 1 to 100, regardless of the system's calculated score.
This fixed score overrides the calculated score and becomes the final value assigned to the customer. Consequently, this will indirectly affect the credit limit calculation if you are using risk classes. Risk classes can be automated based on the score assigned to customers, and these risk classes can then be used in automatic determination of credit limit.
The calculation and logic for score calculation can be seen in the simulation in the blog below.
We have used the following Formula Parameters in our Credit Score Formula, which we will explore in detail in the subsequent step:
- Country/Region)
- Credit Group
- Coface Rating
- Creditsafe Rating
- Affidavit
- Fraud
- Bankruptcy
Credit Limit Simulation:
We can simulate the credit score calculation for a specific business partner to verify the functionality of our formula. You can expect the same results when performing calculations for the same customer in the Manage Credit Account App.
The system initially calculated the score as 64 (22+28+14) and applied a penalty of -40 points (10+30). However, due to the Exit formula parameter (i.e., Bankruptcy), the system overwrote the score to 1, which became the customer's final assigned score.
You can see the calculation for each parameter according to its assigned weight, including any negative adjustments for the penalty parameter. Additionally, the exit condition (parameter) can be observed, with its assigned rating overriding the overall calculation. Ultimately, the score assigned to the customer will be the one set in the exit parameter, such as 1.
- Maintain Formula Parameters App
Numerous formula parameters are already available; ideally, you should use the standard ones, but it is also possible to create your own formula parameters in case business need.
Formula parameters can be categorized into two types:
- Formula Parameter for Score Calculation: Assigned to the Parameter Group for Score Formula (used in credit score formulas).
- Formula Parameter for Credit Limit Calculation: Assigned to the Parameter Group for Limit Formula (used in credit limit formulas).
In this blog, we will focus solely on the 'Parameter Category for Score Formula'.
Let's explore the specifics of below Formula Parameters which we have used in our Score Formula
- Country/Region
- Credit Group
- Coface Rating
- Creditsafe Rating
- Cash Ratio
- Affidavit
- Fraud
- Bankruptcy
If you create a custom Formula Parameter, it must be assigned to the appropriate folder where it belongs. In this blog, we have not created any custom formula parameters for score calculation, as the standard ones are sufficient.
COUNTRY_REGION (Country/Region)
CREDIT_GROUP (Credit Group)
CREDITSAFE_RATING (Creditsafe Rating)
Similarly, we can see other formula parameter.
- Manage Credit Management Rules
Here, valuation is mapped to specific rules.
We will explore the rules that are pertinent to the Credit Score Formula:
- Formula: Parameter Evaluation
- General: Country/Region Risk
- Formula: Parameter Evaluation
Assign values to the parameters that you use to calculate the scoring in credit management.
Pre-delivered formula parameters are available. You can define more formula parameters in this app: Maintain Formula Parameters
We maintain several necessary formula parameters here for our credit score calculation. We assign variable values to these formula parameters, such as the credit group (whatever group you have created in the standard). For each credit group, you can specify an internal result (weightage/valuation). The internal result maintained here corresponds to the weightage you provided for the same formula parameter in the "Manage Formula in Credit Management" app. And that is how it works and contribute to credit score calculation.
There are six columns in Formula: Parameter Evaluation, each serving a different purpose:
- Formula Parameter
- Parameter Value
- Number (Parameter Value)
- Amount (Parameter Value)
- Date (Parameter Value)
- Interim Result
For each Formula Parameter, only one of the following columns will be populated—Parameter Value, Number (Parameter Value), Amount (Parameter Value), or Date (Parameter Value)—depending on the nature of the data, as indicated by the column names.
- General: Country/Region Risk
Specify which country or region is associated with which country/region risk. This rule can be utilized for scoring in credit management. The corresponding country/region risk for each business partner is also displayed in the Manage Credit Accounts app.
4. Master Data and Calculation Process in Manage Credit Account App
Assignment of Calculation Rule and Credit Check Rule
Credit scores are calculated at the business partner level, while credit limits are determined at the segment level. In this discussion, we'll focus on how Credit Score and Risk Class are determined. For information on credit limit calculation, stay tuned for an upcoming blog.
Note: The Calculation Rule (ZCRLIMIT) that we created in Create Rule for Scoring and Credit Limit Calculation configuration serves as the connection among all the configurations and settings implemented for calculating the credit score.
Maintenance of Fraud, Affidavit and Bankruptcy:
Imp: This data is assigned with X (not 1, 2, 3) under Parameter value in Maintain Credit Management Rules App
Financial Statement Data E.g. Cash Ratio
An import feature is available and should be used to update the customer's financial statement data.
- Credit Score calculation.
The validity (score valid to) is determined by the configuration settings in the "Create Rule for Scoring and Credit Limit Calculation" configuration.
In the top right corner, there is a "Calculate Score" button, which becomes available in the Scoring Tab when in edit mode. You can use this button to calculate the customer's credit score.
- Risk Class Determination:
Along with score calculation, the system will also determine the risk class based on the configuration set in "Create Risk Classes."
You can also manage various other parameters in Manage Credit Accounts App for your business partner from a credit management perspective, such as Credit Group, First Year of Customer Relationship, and more.
Note that I have only discussed the items we utilized from the perspective of our blog; there are many other aspects of master data relevant to credit management that are not covered here. This blog is intended for those who have a solid understanding of basic credit management.
Key Links:
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Stay tuned for upcoming blogs on a variety of topics.
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